HP vs. Autonomy: A Cautionary Tale of Mergers in a Tough Economy

Rob Enderle

I’ve had a chance to work through some of HP’s allegations, and as an ex-IBM internal auditor, and one who was for a time focused on acquisitions, I found them chilling. What HP is alleging happened would have been near impossible to discover during due diligence and HP wasn’t exactly stable at the time. The chances that HP would have seen the problems coming are even more remote. It is not atypical to rely on the financials of a publicly traded company, but after reading through the material, I think relying on those financials isn’t a good practice for either public or private firms.  

There were a number of key mistakes made during the acquisition that contributed to this sad outcome. They included an unstable executive staff, including a CEO who was dodging an Oracle court appearance; a drive to do something big in software to validate the choice of a software CEO; and ignoring the objections of the acquiring company’s CFO.  

However, the core cause was that it allegedly appears Autonomy’s financial statements were intentionally misleading to create the impression the firm was far more successful than it was. What will be interesting to find out is how much of this misstatement occurred after Oracle was approached and then rejected the acquisition. I expect information on this last will detail whether HP was intentionally misled by a targeted effort or whether it was late collateral damage to an effort to mislead investors over a long period of time.  

Let’s look at the warning signs for this acquisition in an effort to assure something like this doesn’t recur.

HP’s CFO Was Against It

If this was making an acquisition that wasn’t material to HP, then overriding the CFO was an acceptable risk. But overriding the CFO for what was clearly a very material acquisition was exceptional and I believe, at this scale, an unacceptable risk. Were it to go bad, which it clearly has done, then it opens (and clearly opened) the company up to stock holder lawsuits because it creates the impression of negligence.  

The CFO’s tacit and express approval over a material financial transaction is supposed to be a requirement and part of the financial controls expected of any company. While clearly a CEO can override, by doing so he or she may find the outcome unacceptable in hindsight and clearly in a class of moves that could cost them their job.  

While the HP CEO who oversaw this transaction has already been terminated, had he not, he would now be on life support and this stands as a warning to any other CEO who overrides a CFO for a material expense. This was simply an unacceptable risk and virtually every decision maker involved will likely be held accountable to some degree, and take career damage as a result.  

The Deal Was Rushed

There is a clear sense that the due diligence process was rushed. Clearly, the new CEO needed to validate and execute on a strategy quickly because financial analysts, industry analysts and investors felt he was a bad choice — which he turned out to be.  

Leo Apotheker was also reeling from the failure of Palm, a $1.5B acquisition, that the firm had killed and he had improperly shut down, suggesting he desperately needed a positive distraction. (This didn’t work because he was fired about a month later). It should be pointed out that Leo Apotheker may go down in history as the CEO who did more damage in a shorter period of time, ever.  


His predecessor, Mark Hurd (who had his own challenges), gutted HP’s software unit (he really wasn’t well thought of in HP) and HP didn’t have the senior expertise needed at the time to properly vet much of what was being represented by Autonomy. It appears the accounting teams reviewing Autonomy’s financials didn’t have the time to fully validate what they were given, particularly the nature of the firm’s large customers.   

Given the amount paid and the paper value of Autonomy, there should have been little doubt that the acquisition would be challenged. The care taken when you expect a legal challenge is often far greater than the care taken to simply buy something most agree is needed at market price. But rather than taking an extreme level of care, it appears, because HP needed to execute quickly, the care taken was inadequate and that, now in hindsight, again puts the decision makers at unacceptably high risk. 

False Bidding War

I’ve now seen several of these acquisitions happen where it appears, after the fact, that the acquiring company was bidding against itself. This is a common tactic by property sellers because the buyers don’t talk to each other. Often, if convinced a hated competitor may win, the acquiring company can be driven to unacceptably high prices and then, after the fact, will discover that the other bidders were either a fantasy or had stopped bidding long before.   

The people acting as intermediaries often make a percentage of the sale, making it in their best interest to drive up the sale price, but that clearly isn’t in the best interest of the firm. This makes is doubly important that the process of assessing the value of the asset being acquired by the company is completed and that there is a clear policy in place not to significantly bid over that value.  

Had HP fully assessed the value of the assets it was acquiring, which were more connected to technology than revenue and profit, it likely would have concluded the value for Autonomy was far less than it actually paid.

Allegedly False Financials

We have a fundamental belief that the controls over public companies prevent creative accounting even though the financial institutions clearly demonstrated that wasn’t the case last decade. The fact is that when you put a substantial amount of financial pressure on a firm, pubic or not, controls fail. What I’m saying is that, assuming HP’s allegations are true, it is likely there are a large number of other public companies in the market that are misstating their financials to appear more attractive.  

Companies that have had substantial CFO turnover are largely made up of recent mergers, or that are showing strong financial improvement without evidence of improved customer demand, are the most likely to be misstating their financials. Firms like this should likely be avoided as too risky either as acquisitions or investments.

Wrapping Up: Thinking Tactically

Overall, I think that we will likely find that the issue between Autonomy and HP is largely the result of both the buyer and the seller thinking tactically — HP moving to, in one step, create a viable software division and/or distract from another failure with an emphasis on speed rather than quality; and Autonomy allegedly adjusting financial statements to maximize the purchase price without anticipating what would happen should these adjustments be disclosed and reported. The folks on the sale side of this deal may lose not only their wealth but their freedom if HP prevails; HP clearly didn’t get most of the value it paid for; and if the same HP CEO who did this deal was still there, he’d likely be fired now. And the Autonomy CEO is effectively defending against as-yet unfiled criminal charges.  

So, when doing a major acquisition, get the CFO to bless it, take all the time needed to fully understand the true value of the asset being acquired, don’t get tricked into bidding against yourself, don’t trust the financials even from a public company, and be sure to think through and plan for the likely outcomes.  

In short, make sure you can be proud of this highly visible move rather than spend your life explaining why it wasn’t as idiotic as it subsequently seemed or wondering where your freedom went, which is the expected future of the past HP and Autonomy CEOs. 



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